In the coming year of 2021, the RMB exchange rate has appreciated slightly by about 2.5%, but overall it still fluctuates in both directions within a reasonable range. The annual fluctuation range has been compressed to between 6.34 yuan and 6.58, with an average value of 6.46 yuan. Among them, the RMB exchange rate against the US dollar fell to a certain extent in March, once close to 6.58 yuan, but it also rose to around 6.35 in May and December, and the fluctuation range was still within a reasonable range.
Looking forward to 2022, how will the RMB exchange rate change? What factors will still affect the trend of the RMB exchange rate? Focusing on these issues, a reporter from China Finance News conducted an exclusive interview with Guan Tao, global chief economist of BOC Securities. Guan Tao told the Financial Associated Press that the factors affecting the RMB exchange rate next year will still be a combination of long and short, and it is expected that the two-way fluctuations may further intensify.
Export prospects remain a key factor affecting exchange rate trends
Regarding the factors that will affect the trend of the RMB exchange rate in 2022, Guan Tao believes that under trade, China’s export prospects are still the key factor affecting the trend of the RMB exchange rate. China’s export situation next year will mainly depend on the development of the global epidemic and will face two scenarios.
If the global epidemic gradually improves and the economy reopens, China may face an outflow of export orders, a slowdown in growth, and a decline in trade surplus. The domestic foreign exchange supply and demand gap will be narrowed, and the RMB exchange rate may tend to depreciate; but if the global epidemic continues to spread, the economy will restart As a result, China’s export share has increased and its trade surplus has expanded, which will continue to support the RMB exchange rate.
However, Guan Tao believes that under the capital account, there is no inevitable connection between capital inflow or outflow and the trend of the RMB exchange rate. His analysis pointed out that in the first three quarters of 2021, the capital account (including net errors and omissions) was all in deficit, but the central parity rate of the RMB against the US dollar fell by 0.7%, rose by 1.7%, and fell by 0.4% respectively.
This is because, after the central bank withdraws from normal intervention in the foreign exchange market, the current account and capital account in the balance of international payments have a mirror-image relationship. That is, if the current account is in surplus, the capital account must be in deficit, and the RMB exchange rate can rise or fall during the same period.
Sino-US interest rate differentials, financial risks and the impact of the US dollar index on the RMB
In addition to export prospects, market factors that will affect the RMB exchange rate in 2022 include Sino-US interest rate differentials, financial risks, economic recovery, and the U.S. dollar index. Guan Tao pointed out that if the U.S. inflation index continues to be high in 2022, it is not ruled out that the Federal Reserve may raise interest rates ahead of schedule. In order to meet the needs of stable economic growth, domestic monetary policy must insist on putting me first and keeping stability at the forefront.
In recent years, the flexibility of the RMB exchange rate has increased, the currency mismatch in the private sector has improved significantly, and the current domestic inflation pressure is relatively light, all of which have increased the autonomy of my country’s monetary policy. If US dollar liquidity tightens, while RMB liquidity continues to be loose or even looser, this may further narrow the Sino-US interest rate differential, slow down the momentum of foreign capital inflows, and thus narrow the gap between foreign exchange supply and demand.
From the perspective of financial risks, hidden internal and external financial risks increase the uncertainty of the RMB exchange rate trend. External risks in 2022 will mainly come from loose monetary policy, economic recovery, and epidemic developments that are less than expected, which may lead to adjustments in global asset prices and tightening panic in some emerging markets. At that time, whether RMB assets are safe-haven assets or risky assets will be tested.
The main internal risks faced by the RMB are that in the context of weakening economic growth momentum and tough reforms, if the risks in the domestic real estate market, stock market, bond market and bank credit market are released, it may reduce market risk appetite and be negative for the RMB exchange rate.
In addition, the trend of the US dollar index still has an important impact on the RMB exchange rate. Since 2021, the fluctuations in the US dollar index have basically dominated the two-way fluctuations in the RMB exchange rate. In 2022, the factors affecting the trend of the U.S. dollar index will continue to be bullish and short.
Guan Tao said that if the economies of developed economies such as Europe, the United Kingdom, and Japan return to pre-epidemic levels, and the European Central Bank, Bank of England, Bank of Canada, and the Bank of Australia start the process of normalizing monetary policies, it will be negative for the U.S. dollar index. If the global epidemic continues to evolve, the international financial market is turbulent, and geopolitical conflicts intensify, it will stimulate market risk aversion, or if the temporary theory of inflation is falsified and the Federal Reserve is forced to accelerate monetary tightening, this will be positive for the US dollar index.
Two-way fluctuations in exchange rates will better play the role of automatic “stabilizers”
Regarding the relationship between exchange rates and the economy, Guan Tao believes that when the exchange rate is determined by the market and is responsible for price clearing, the balance of payments will show an independent balance pattern, with the current account and capital account mirroring each other; exchange rate fluctuations help absorb internal and external shocks and enhance the independence of monetary policy.
Therefore, if the two-way fluctuations in the RMB exchange rate intensify in 2022, the financial pressure on foreign trade companies may continue to ease, and the exchange rate may better play an automatic role in stabilizing the international balance of payments and macroeconomic stability.device” function.
He said that the latest world economic outlook released by the IMF shows that global economic growth will fall by 0.1 percentage point in 2022. Therefore, China’s economic recovery lead over the United States and Europe will further fade in 2022, which may be negative for the RMB. However, if market expectations are properly guided and the market believes that China’s economic downturn is close to its potential output level and that the economic recovery of other economies is not as good as expected, then it will be positive for the RMB.
Next year, my country’s foreign exchange policy will continue to adhere to the neutral principle
Regarding the foreign exchange policies that may be introduced next year, Guan Tao pointed out that in recent years, government departments have insisted on regulating capital flows through market-oriented means and maintained the transparency of exchange rate policies. As the renminbi continues to appreciate unilaterally, the country has successively introduced a foreign exchange policy combination of “increasing exchange rate flexibility + regulating capital inflows + expanding capital outflows”.
Among them, measures to increase exchange rate flexibility refer to fading out the use of countercyclical factors in the central parity quotation model of RMB against the US dollar; measures to regulate capital inflows refer to reducing the macro-prudential adjustment coefficient of cross-border financing of financial institutions and enterprises, and increasing the foreign exchange rate of financial institutions. Deposit reserve ratio; measures to expand capital outflows include newly approved QDII quotas, lowering the foreign exchange risk reserve ratio for forward foreign exchange purchases, and increasing the macro-prudential adjustment coefficient for overseas lending by domestic enterprises.
Looking forward to 2022, government departments may continue to guide companies to establish risk-neutral awareness and strengthen the management of currency mismatch and exchange rate exposure risks. Guan Tao suggested increasing trade settlement in RMB and encouraging financial institutions to help companies increase the use of foreign exchange funds. Efficiency, appropriately increase the foreign investment quota of Qualified Domestic Institutional Investors (QDII), support domestic institutions to purchase foreign exchange for foreign investment, and effectively hedge trade surplus.
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